OTOT: Pat: A.Greenspan and the Heisenberg principle. I thought the readers
of this thread would appreciate it GG.
TA
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Barron's Online
August 30, 1999
Werner Visits Wall Street
By Alan Abelson
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Heisenberg is alive and well.
And so is his principle.
Don't feel bad if the name doesn't ring a bell. Unless you're into quantum
mechanics or, at the very least, like to curl up with a dogeared physics text,
there's no reason it should. The Heisenberg we're referring to is the
distinguished (and departed) Nobel Prize winning German physicist, Werner
Heisenberg, best known among hoi polloi like us for the uncertainty principle.
In rough translation, that principle posited that certainty in scientific quest will
always be compromised because the very act of observation alters what's
being observed (we did say a rough translation).
As it happens, Heisenberg and his principle, quite unannounced, showed up in
Wall Street on Friday and gave the markets a fright. And they were escorted
there, if you can believe, by none other than Alan Greenspan.
Not that Mr. Greenspan was spotted prancing about with a ghost and a
principle in the neighborhood of Broad and Wall. In point of fact, he was at
some remove from that infamous intersection, stretching his limbs in Jackson
Hole, Wyoming.
We both envied and commiserated with the Fed chief. Envied because
Jackson Hole is one sweet place to be. On the other hand, its normally
pristine air was strangely noxious, a condition that was traced, thanks to an
emergency investigation by the Environmental Protection Agency, to the
presence of a large group of central bankers.
And indeed, besides yielding to an impulse to flee Washington in late August,
when that city's resemblance to Hades transcends the metaphorical, Mr.
Greenspan had journeyed to Jackson Hole to deliver some words of wisdom
-- or at least talk to -- the assembled central bankers. And it was from that
podium that he loosed Heisenberg and his principle on unsuspecting Wall
Street.
Mr. Greenspan pulled off that bit of long-distance prestidigitation by first
informing his well-fed, impeccably barbered audience that he and his merry
band at the Federal Reserve had discovered that the stock market has an
effect on the economy. Needless to say, but we will, anyway, after gasping in
astonishment, the bankers rose to their feet (which is not an easy maneuver
for a number of them) and spontaneously saluted Mr. Greenspan with a burst
of applause.
But then he confessed that the Fed had not been able to determine how the
stock market affected the economy. And that's when Mr. G began to conjure
up the spectre of Heisenberg. So, Mr. G went on, it would be necessary that
he and his mates keep close watch on the stock market to try to get a handle
on how it influenced the economy.
Presto! That sent Heisenberg and his trusty principle winging to Wall Street,
where, frankly, they gave the poor denizens conniptions. For said denizens
perceived that the very act of focusing on the stock market inevitably meant
that the Fed would exert an impact on it. And since the market had managed
to do rather well for going on nine years absent such attention, they feared
Fed focus could only spell trouble.
And, it may really surprise you, we have a hunch they're right.
The stock market actually took awhile to grasp the implications of the Fed's
epiphany, as disclosed by Mr. Greenspan, and it wasn't until rather late in the
session that most of the damage was done. The explanation for the somewhat
delayed reaction was that it took investors three-four hours to decipher what
Mr. G was saying. In contrast to some of his recent pronunciamentos, which
have been relative models of clarity, in his remarks to the central bankers, he
reverted to his former public-speaking style, which features impenetrability
enlivened by occasional obscurity.
The bond markets were much quicker to get the message. We're not sure
whether bond people are smarter than their equity counterparts or more
nervous.
Despite Mr. Greenspan's dense language, which may have been a bow to his
audience, since central bankers tend to talk in tongues, certain key words and
combinations of words came through loud and clear to investors. One was his
labeling of the stock market's rise over the past five years as "extraordinary."
That may lack the rhetorical flourish of "irrational exuberance," but it
somehow struck an ominous note just the same.
Especially since he suggested that making the rise all the more "extraordinary"
was that it couldn't be explained entirely by strictly economic drivers like
earnings. Rather, he indicated less savory factors also were at work, alluding
to "waves of optimism and pessimism." Since pessimism has been on
extended leave, one can only assume the waves he had in mind were bullish
ones.
Morever, he indicated that even earnings have been hoked up, in some
instances by capitalizing expenses, but more insidiously by disguising labor
costs through the use of options as compensation instead of traditional coin.
We'll refrain (with some difficulty) from musing on why the Fed has come so
late to the realization that the use of stock options instead of cash to pay
employees may be distorting (read: understating) wage inflation. We'll even
refrain from voicing the suspicion that to do so would have been politically
incorrect. |
